Oct 23, 2017
GE shares crater after analysts and investors panic that it will have to cut its dividend
Wall Street is torn on General Electric, the one-time favorite blue chip for long-term investors, which is now facing an identity crisis and possible dividend cut.
Major research shops downgraded and upgraded the industrial company following its third-quarter earnings miss Friday.
The firm's September quarter profits were hit by restructuring costs and weak performance from its power and oil and gas businesses. It was the company's first earnings report under CEO John Flannery, who replaced Jeff Immelt in August.
Two firms reduced their ratings for General Electric shares due to concerns about dividend cuts at its Nov. 13 analyst meeting. The company has a 4.2 percent dividend yield.
General Electric shares declined 6.2 percent midday Monday to around $22.35 a share after the reports. The percentage drop is the largest for the stock in six years at this level.
Its shares are down 25 percent year to date through Friday versus the S&P 500's 15 percent return.
"The reduction to our target price is driven by a substantial cut to earnings expectations," Morgan Stanley analyst Nigel Coe wrote in a note to clients Monday. "We also see a higher probability of a dividend cut that we do not view as priced in. We believe investors need to take action to protect against the possibility of near term underperformance in the event of a dividend cut in November and this is clearly an additional factor in our rating change."
Coe lowered his rating for General Electric shares to underweight from equal weight. He also lowered his price target for the company to $22 from $25.
UBS also said the company's 88 percent earnings payout rate for its dividend is likely to come down.
"Management is very focused on cash now which means lower capex, likely better working capital but some of the same market related challenges," UBS analyst Christopher Belfiore wrote in a note to clients Friday. "We could see a scenario where management takes the opportunity to reset the dividend to a reasonable and sustainable payout ratio (40-50%). If they maintain the high dividend, we are concerned about under-investment relative to competitors even as they tighten execution."
UBS reduced its rating on the company to neutral from buy and lowered its price target to $24 from $31.
On the flip side, Bank of America Merrill Lynch believes all the bad news is now discounted in General Electric shares.
"Our key assumption is that new Power outlook is conservative enough where it does not need to be revised down again," analyst Andrew Obin wrote in a note to clients Monday. "Our analysis indicates that earnings revisions have been the key driver for GE stock over the past decade. We assume that negative revisions are bottoming as EPS guide has been properly reset on a multi-year basis going into the 11/13 analyst meeting."
The analyst raised his rating for General Electric to buy from neutral with a $27 price target.
When asked for comment, General Electric referred to the CEO's interview on CNBC Friday as its response.
by Tae Kim